Historically, “companies” (a term defined below) and their customers often have done business across a gap, so to speak. Product or service offerings by a company and the customers' desired product or service do not fully match. In part, this gap is a manifestation of the facts that (1) companies have an incomplete grasp of customer needs, their relative preferences and the pricing utilities customers attach to those preferences (which utilities, equating to the customer's willingness to pay, are dynamic) and (2) a company's costs, profits and inventory (which may control what it can offer on a timely basis) are also dynamic. However, it is also in major part a manifestation of the lack of information technology tools, which can close the gap. To collect dynamic customer and company data and then employ those dynamic data to close the gap is a complex technical problem.
Companies have developed many approaches to increase their internal efficiencies and productivities in order to maximize their gains and profits. With the advent of the computer, companies have, for example, embraced tools to optimize supply chain resources. They have, for example, focused on internal operations and the use of automated processes to integrate the discrete steps from the supplier to the finished goods inventory floor (or service delivery), improving efficiency. Yet still the end customer typically has been treated as an indistinct, static and detached entity—a statistical profile, in the aggregate—sitting behind a wall and creating demand for the rest of the supply chain. Manufacturers (whether of goods or services) have tried to influence the customer demand via indirect means of advertising and promotions. Beyond the influence that these indirect means can have on a customer's purchasing decision, the manufacturer and retailers have for the most part (at least in mass market situations) considered customer demand fluctuations as a given parameter that can't be altered or managed directly. Moreover, in industries where a company typically has an extremely large customer base (e.g., the airline industry, as discussed below), there has been no mechanism which a company could used to tailor its offerings to individual customers, except by providing multiple selections that are fairly static.
Generally, the customer is treated as an individual and sales terms are customized only when the cost of negotiation is justified—for very large transactions. Indeed, the basis for mass marketing a product or service arguably is the “cookie cutter” approach of “one size fits all” transactions. As is said of the genius of Henry Ford in marketing the Model T automobile: the customer could have any color . . . so long as it was black.
With the advent of the global Internet, some providers of goods and services have sought ways to improve their sales and profitability by, for example, directing incentives and rewards to loyal customers enrolled in affinity marketing plans. They have surveyed the customers in efforts to improve product offerings, and they have accordingly modified their offerings. But still, with a take it or leave it approach. “Here are my sale terms and product offerings; buy or don't buy, the choice is yours.” Automation has permitted much better targeting of customer groups, but the group still has to be large. For example, a higher end automobile dealer might use a mail campaign tailored to a specific Zip Code instead of a print ad in a regional or national media.
Many products and services, though, represent complex, multi-faceted offerings and customers weigh their preferences for product features differently at different times. A customer might care more about cost one day and more about availability or delivery time or warranty if queried a few days or weeks later, to use some basic trade-offs as examples. Generally, a company's product consists of many value elements, (explained later) all of which are bundled together to be sold as a single product. But, not every customer values all the aspects of a product equally or needs all. Every customer places a different value (which may be a function of time and situation) on each aspect of a product. With features bundled together in a product, companies end up either incurring costs to sell something to a customer that he does want or lose a customer because the extra undesired value elements forced the product price too high for the customer.
Many companies offer several levels and kinds of products and services with different features sets and price ranges to suit different customer segments. This is evident in several industries such as the airline, car rental, hotel, cruise, travel, special events, automobiles and others. For example, airlines offer non-stop and connecting flights and for a same flight offer multiple flight “cabins” or “classes” (defined below) such as first, business and coach. Car rental companies offer several levels of rental cars such as economy, full size, luxury or SUV. Hotels and cruises offer different types of rooms and suite packages. Special events like sports games and concerts offer variety of seating (front rows, middle section, rear, balcony). Automobile manufacturers offer multiple cars and several grades for the same car model, such like LX, EX and EXL. Real estate developers offer all kinds of homes and optional upgrades to them. Title objective behind offering multiple levels and types of products and services is to cater to the different customer segments with varying needs and financial capacities, and thus to maximize revenues and profitability. A company typically uses consumer demand forecasts to build product quantities to match demand. However, companies' forecasts often prove imperfect, leading to shortage or excess supply in one or more product types.
The underlying problem is both that customer demands are incompletely understood and that such demands can change quickly, whereas a company's productive capacity or service often does not have the same dynamic time frame and is supported by a relatively fixed (in the short term) capacity and supply chain.
As explained above, customers have varied needs and preferences and they evaluate products accordingly. In a customer's frame of mind, products with higher perceived satisfaction (utility) values generally are ranked higher than those with lower perceived utilities. Generally, products that (most customers would) rank higher are also higher priced. Therefore, customers would want to buy a higher ranked product only to the extent that the additional value and incremental price satisfies their individual utility dynamics. Many times customers cannot buy their desired product and have to content themselves with a lower-ranked product because of high price or unavailability. The price component may involve budget constraints or a perception that the higher rated product is over priced. Consider a company that sells two products A and B, where most people rank product A higher than product B and consequently or otherwise, A is also priced higher than B. What happens, when company face an excess supply of A? The situation becomes trickier when products in question are perishable in nature and of high monetary value. The company faces the dilemma of either to lower the price and face future revenue dilution, or to write off its unused capacity/excess supply for A. Advertisements and marketing campaigns can help to stimulate demand but not in the short term. In these situations, when it is difficult or not feasible to generate more demand, or even otherwise, a good solution is to upgrade the mix, or in other words, to upgrade the current customers to products rated higher than those bought currently. In the above example, there might be several customers who have bought B but would be willing to buy (or, rather switch to) A if A were offered to them at price and on terms that suit them. However, there is currently no mechanism for implementing this method in a mass market situation. In other words, there are no systems or methods available to do this optimally in a mass market situation, let alone while concurrently maximizing the benefit to the company. If the company were to have some knowledge of its customers' intentions, the company could be more exacting in its ordering, staffing and delivery. Inefficiencies thus would be reduced, revenue and profitability would be increased and the company would then be able to reduce its price to the customer while simultaneously improving profits.
The airline industry is an excellent example of one in which customer utilities vary considerably, and wherein it is appreciated that customers will pay for different levels of service. However, current ticketing and other support systems are inadequate to offer customization of service offerings commensurate with a customer's preferences and utilities.
An airline flight typically offers several levels of service through different cabins like coach (or economy), business and first. Most domestic flights in the United States have only two cabins, coach and first. There are some domestic flights that have either one cabin (by definition, all coach) or three cabins (coach, business and first). Airlines may use different names to refer to these cabins (explained elsewhere). The idea behind creating different cabins in an airplane is to provide different levels of service to its passengers, ranging from regular (economic) service in the coach cabin to most luxurious (and most expensive) level of service in the first cabin. The services differ in areas including, but not limited to, seating space and comfort, in-flight amenities and food service, priority-check-ins and luggage handling, reservation services and frequent flyer benefits. In a flight with three cabins, the first class cabin is usually the most expensive and luxurious, followed by the business class cabin and the coach class cabin. For these reasons, most airline passengers value the first or business class travel experience more than the coach class travel experience. Some first cabin fares may be as high as 5-10 times a discounted coach fare for the same Itinerary.
For simplicity, let us consider the discussion for a flight with only two cabins, first and coach. A detailed case with a greater number of cabins is presented later. High prices for the first class cabin often result in lower demand, leading to the existence of unsold seats in the first cabin. However, airlines seldom opt to reduce the Ticket Price for first class significantly to stimulate and increase demand. Rather, they try to use unsold seats to offer upgrades to selected passengers in coach. Airlines know that many passengers in coach would love to travel in the first cabin and, hence, they try to increase customer loyalty and offer first cabin upgrades to selected coach passengers, as an added benefit. Airlines have created several programs to offer these upgrades, such as frequent flyer award upgrades, elite traveler upgrades, corporate upgrades and staff upgrades.
In the frequent flyer mile award upgrade program, a passenger enrolled in a frequent flyer program may be able to use his or her accrued frequent flyer miles to purchase a first cabin upgrade. Certain frequent flyer passengers with extremely high travel frequency earn “Elite” (or special) status and become eligible to receive a certain number of first cabin upgrades for free. Airlines also create different upgrade programs for their corporate customers, both as a customary gesture and in exchange for return of frequent flyer miles. Airlines also offer upgrades to their staff, either for free (as employment incentives) or for frequent flyer miles. Some airlines have begun to sell first cabin upgrades for $35-$50 at airports (“Check-in Upgrades”).
All these mentioned upgrade programs try to enhance the customer mix, or in other words, try to utilize the unsold first and business cabin seats to generate monetary or non-monetary benefits for the airline. However, none of these programs provides a solution that can optimally utilize all of the unsold first cabin seats. Even today, after using all sorts of upgrade programs, there are flights that still fly with empty first and business cabin seats. This occurs even though, there are coach passengers willing to pay somewhat more than the coach fare to get the otherwise empty first cabin seat. This clearly indicates that the existing upgrade programs are not very effective in tackling the situation.
The frequent flyer miles, elite, staff and corporate upgrade programs do not generate direct cash benefit for the airline. Also, only a select group of passengers are eligible to use these benefits. Frequent flyer miles and elite programs can be used by only those who have accrued high mileage and/or have earned “elite” status. Only airline staff can use the staff upgrade programs. Only some executives from a few corporations, who have arrangements with an airline, can benefit from the corporate upgrade programs. The check-in upgrade program does generate direct cash benefit but it is quite limited in its reach to passengers and in the potential revenues it can generate. In most instance, when a flight flies today with some empty first class seats, there are passengers traveling in coach who would want to take those unsold seats, at some price and/or on some terms that would bring direct or indirect benefit to the airline. However, there is no mechanism today to match the unmet needs and preferences of those coach passengers with the availability of unsold first cabin seats, much less to do so optimally (i.e., concurrently maximizing benefits for the airline and for the individual passengers' travel utility).
There are several factors contributing to this circumstance, as follows.
Varying passenger value: The relative value for travel in first class over coach varies from passenger to passenger. Even for the same passenger, the relative value changes from one trip to another (and even from one flight to another on the same trip) depending on rip duration, travel needs, budget, logistical factors and other personal or business constraints or needs. A business traveler may want to travel in the first cabin for all his trips to enjoy its luxury if his/her company pays for it. However, the same executive may desire to fly the cheapest coach ticket for all his personal (self-funded) trips. It has not been easy so far to accurately estimate a passengers' relative value in real time (or in quasi-real time).
Revenue dilution: If an airline chose to lower prices for the first cabin, it could, as a practical matter, probably fill all or nearly all of its first cabin seats, but that may cause heavy revenue dilution. Increasing the number of seats sold due to a reduction in unit Ticket Price may not necessarily increase the total ticket sales revenue. Hence, it may not be economically viable for the airlines to reduce the price for the first cabin seats. As is evident from the number of tickets purchased at regular first cabin fares, a level of demand exists for the high priced first class tickets. However, that demand varies and is often not sufficient to fill all first cabin seats.
Uncertain seat availability: It is very uncertain and difficult to predict at the outset exactly how much demand exists for first cabin seats at the given travel prices. Consequently, it is difficult for an airline to know accurately the capacity sold and unsold until the last few minutes prior to departure. The problem becomes worse as several booked first cabin passengers do not finally turn up for the flight (so-called “no shows”) or cancel their trips at the last minute.
Last-minute upgrade logistics: The exact availability of first cabin seats can be known only minutes before departure, once the airline stops taking any additional passengers for the first cabin. At that point, however, an airline doesn't have much time to find potential passengers and process upgrades to fill the unused first cabin seats. They are under the gun to fly on schedule. A short delay in the departure of one flight can reverberate throughout the system and delay several other flights, leading to huge costs and customer ill-will (probably much more than the additional revenue earned from additional passengers).
Based on the above, there is no currently existing upgrade program that can (optionally or even roughly) match airline inventory with passenger travel utility to fill first cabin seats. There is no systematic method or system available that allows an airline to optimally utilize the unsold first class seats, let alone while concurrently maximizing the benefit to passengers (as a whole).
Similarly one can point to examples in many other industries, such as hotels, car rental, cruise, special events, automobile rentals and so forth. In the hotel industry, for example, deluxe or royal suites (i.e., the higher-rated and more expensive rooms) often don't get booked as frequently as other rooms, because of inadequate demand at existing high prices. The hotels do not currently have an optimal way to deal with this situation.
Consider another situation that affects an interaction between the customer and the company. While buying products, many times, customers are unsure of their exact needs or expect their needs to change (after purchase and before they utilize the product). In such cases, customers may prefer to have some flexibility to alter their purchases to accommodate their needs. In several industries, customers have to select and confirm the products at the time of purchase. Some industries do allow customers to return or change their purchased orders within a defined time frame and with or without penalties. For industries where products sold are of high value and/or perishable nature, change penalties are quite high or changes are not allowed. For example, airline ticket booking, hotel reservation, car rental, automobile sales, special events, real estate and so forth.
In the airline industry, customers usually buy tickets one to four weeks in advance (of the premeditated travel date) and are often unsure of their exact travel plans at the time of purchase. But, customers may not want to wait until the last minute (or till they determine their exact plans) to book flights as the flights may become unaffordable or unavailable as the departure date approaches. So, customers try to make the purchase decisions based on their best estimate of travel plans, and hope that their reservations would match their eventual travel needs. Such guess work often creates problems, as needs change and customers end up with bookings at variance with their desires.
On the other side of the screen, often, companies face unequal supply-demand proposition for their products. For many products, the supply keeps ahead of the demand even after all sorts of advertisements and marketing strategies. Companies are not able to efficiently utilize the surplus supply (especially in case of products that are perishable or prone to quick obsolescence), causing millions of dollars in lost opportunity and costs. Continuing with the airline example, most US airlines experience an average load factor of less than 80% or only about 80% of the seats get used. The rest 20% seats fly empty and contribute almost nothing (if any) to the incoming revenue. A significant portion of this surplus capacity could be used to satisfy the unfulfilled flexibility needs of at least some customers, who may have wanted to alter their bookings to include one or more flight that had a surplus capacity. However, today, travelers who want to change their flights are unable, hesitant or unhappy to do so because of efforts required, change fees, higher fares, unavailability of desired flights (or fares) or any combination of such factors. A good chunk of these customers would be willing to pay more (as per their needs) to get desired seats. But the entire change process creates an embarrassing situation for a customer and seldom drives a satisfactory experience. This represents a mismatch in customers' needs and airline's offering. In a nutshell, airline has perishable seats that customers desire but the current system does not allow the customer to get that seat at a price that would benefit both.
Today, airlines do not have any mechanism to allow such flexibility or changes in customer tickets at an individual level at conditions that would optimally satisfy both the parties. Instead, airlines try to deal with all such customers in a rather mechanistic way (or one cancellation/change policy) leading to unsatisfied customer demand and unused airline capacity. Besides the airline industry, there are several other industries (as mentioned above) that either do not allow flexibility or follow processes that involve high costs and/or demand significant efforts on the customer's end.
What is needed is a mechanism that allows customers to satisfy their need for flexibility at terms that con currently benefit both companies and their customers. With respect to the airline example, there is a need to provide flexibility to the customers in way that also benefits the airline. However, currently companies don't provide any such mechanism. In fact, companies try to resist changes in purchases as they a not able to handle it and it creates further chaos. They put high astronomical fees (change fees, to stop customers from making frequent changes.
Indeed, there is no system or method available that can be applied to all the above industries, and many more, and help companies to match the availability of their products to their customers' preferences, let alone while concurrently maximizing the benefits to both the company and its customers.
A technology platform (i.e., system) and methodology thus are needed for customizing, in an optimal way, a match between a company's cost and ability to provide flexibility to customers in buying products/services with the individual customers' relative preferences and utilities. In the airline industry example, a technology platform (i.e., system) and methodology thus are needed for customizing, in an optimal way, a match between an airline's cost and ability to provide travel flexibility to customers with the individual customer's preferences and utilities for travel flexibility.
A technology platform (i.e., system) and methodology thus are needed for customizing, in an optimal way, a match between the availability and pricing of higher ranked products/services with the individual customers' relative preferences and utilities. In the airline industry example, a technology platform (i.e., system) and methodology thus are needed for customizing, in an optimal way, a match between the availability and pricing of unsold up cabin seats (or higher ranked products) with the individual passenger's relative travel preferences and utilities for up cabins (or higher ranked products).
More particularly, a system and methodology are needed which support customization of service offerings in the airline and similar industries. Such customization preferably will address the different preferences customers have for flight scheduling, service upgrades, and responses to a variety of contingencies.
If such a match could be made, both company and customer would benefit. The customer would be more satisfied and the company (both in short term and long term) will be more profitable. A win-win scenario is created rather than a zero sum game.